ii view: Tesco's market share reaches decade high

Third-quarter and Christmas trading update to 3 January

• Like-for-like Q3 sales for the 13 weeks to 22 November up 3.1% 
• Like-for-like Christmas sales for the 6 weeks to 3 January up 2.4%

Guidance:

• Now expects full-year adjusted operating profit at the higher end of a previously forecast range of £2.9-3.1 billion compared with last year’s £3.13 billion

Chief Executive Ken Murphy said:

“Competition is as intense as ever and we know value remains a priority for customers. We are determined to help customers make their money go further.

“We are well positioned for the year ahead and remain committed to ensuring customers get the best possible value by shopping at Tesco."

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ii round-up:

Starting out as a market stall in 1919, Tesco (LSE:TSCO) today operates over 5,000 stores across the UK, Ireland, Czech Republic, Slovakia and Hungary.

Headquartered in Welwyn Garden City, Hertfordshire, the group also owns wholesaling business Booker. Most stores operate under the Tesco brand, although with some, and including outlets run by franchised businesses, operating under the ‘Booker’ and ‘One Stop’ brands.

For a round-up of this latest trading update on 8 January, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a stock market value of just over £27 billion. Rivals include Marks & Spencer Group (LSE:MKS), valued at £7.3 billion, Sainsbury (J) (LSE:SBRY) at £7.1 billion and Ocado Group (LSE:OCDO) at £2.2 billion. Geographically, the UK and Ireland accounted for most sales over the group’s last financial year at 94%, with Central Europe the balance of 6%.

For investors, rising staff costs given UK government tax increases and a push to keep product price rises to a minimum likely underpin management’s estimate for flat profits this financial year. Sales at wholesaling division Booker fell 1.3% over the combined period, likely hindered by pressured tobacco demand. A forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap, while private equity-owned rivals Asda and Morrison are not standing still.

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More favourably, market share of 28.7%, its highest in over a decade, remains comfortably above rivals. UK online sales increased again , rising 11.2%, with sales for relatively new fast delivery service Whoosh up 47%. A diversity of geographical locations contrasts with UK-only Sainsbury's, while a focus on shareholders returns includes share buybacks of over £3.5 billion since October 2021 and a prospective dividend yield of 3.4%.   

For now, while profit pressures offer some caution, an impressive record of market share gains and consensus analyst fair value estimate above 470p per share, will likely see investors stay optimistic about the long term.  

Positives

• Robust UK market share
• Ongoing growth in online sales

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy